Sebi wants monitoring agency to keep an eye on all IPO funds

Earlier, in several cases, companies have changed the stated object of use of IPO funds while many have vanished from the market.

SummaryEarlier, in several cases, companies have changed the stated object of use of IPO funds while many have vanished from the market.

In the four-year period between April 1993 and March 1997, as many as 4,005 companies entered the capital markets with their initial public offerings (IPOs) to raise an aggregate of Rs 41,319 crore. The IPOs accounted for more than 9 per cent of the average market capitalisation of Bombay Stock Exchange over the four-year period.

If these many companies raised money from the public, several companies also duped investors in the pretext of public offer — vanishing from the market over the coming years. There are 238 companies in the ministry of corporate affairs’ list of ‘vanishing companies’ and out of that, 87 remained untraceable till March 2012.

While nobody was held accountable for investors’ loss then, the Securities and Exchange Board of India (Sebi) has now proposed that all companies that come up with IPOs need to set up a monitoring agency that will look into the use of issue proceeds. The market regulator has also looked into putting some onus on independent directors, management and audit committee in the same regard.

This is a big move by Sebi. Earlier, companies coming up with public offerings of raise less than Rs 500 crore were not required to have any monitoring agency.

A look into Initial Public Offers in the last three calendar years (2011-2013) shows that only 8 out of the 51 public issues raised over Rs 500 crore from the market, whereas more than 80 per cent of the issues had issue size of less than Rs 500 crore.

Therefore, going by the current market regulations, a large number of companies attracting a significant number of investors are not required to float a committee that monitors the use of the IPO money — a big gap in the regulations, which Sebi looks to bridged with its new proposal.

“It is a move in the right direction as it will provide protection to all investors against misuse of IPO funds in companies. If the regulator is worried about misuse of funds then all investors need to be protected,” said Prithvi Haldea, chairman, Prime Database.

Proposed regulations

After almost four years that the government had asked the capital markets regulator to figure out ways to monitor the use of IPO proceeds, Sebi has finally come out with a discussion paper on the same, inviting public comments till March 25.

The market regulator has also proposed that the monitoring agency will have to submit its report on a